Banks have started putting the brakes on short-term corporate loans, as they want greater clarity on the end-use of such funds.Bankers said they are no longer sanctioning such loans, especially after the 2G spectrum scam came to light. telecom companies took short-term funds to buy airwave licences from the government, which were supposed to be converted into long-term loans.
Short-term loans usually have a tenure of 3-12 months and a lower rate of interest.
Last month, the Reserve Bank of India reminded banks to carry out proper due diligence when sanctioning loans, especially short-term ones, and asked them to keep a close watch on the end-use of funds.
"We are going slow on short-term loans where the end use is not clear. Companies tend to take short-term loans from banks, for instance, if there is a mismatch in working capital. But we are not lending where we are not sure about the productive use," said T M Bhasin, chairman and managing director, Indian Bank.
However, Indian Bank said it is going ahead with the disbursement of loans that were approved earlier.
Caution on short-term loans has also been prompted by RBI's concern over the high incremental credit-deposit ratio.
The incremental C-D ratio - how much banks lend for every rupee in deposits received - stood at 102 per cent, even after meeting cash reserve ratio and statutory liquidity ratio obligations.
As a result, RBI Governor D Subbarao has asked banks to restrain credit growth.
"We need resources, because without that credit growth will be difficult. RBI has asked banks to align credit growth with the growth in deposits. Naturally, there is some tightening in short-term loans," said Indian Overseas Bank CMD M Narendra.
Some banks have also cited lower returns as a disincentive for pushing short-term loans.
"The margins are lower because they are linked to short-term interest rates," said a senior official from IDBI Bank, adding that in the SME, farm and housing sectors there is no slowdown because of banks' priority sector commitments.
Another area where banks are cautious is loans given under multiple banking facilities. Multiple banking facilities, unlike syndicated loans, have different interest rates for the same project.
"A lot of companies go to different banks for the same project and get a loan. But as the banks are met individually, the decision-making process is not robust.
"Companies prefer such a route as they can get interest rate benefits, unlike the uniform rate of syndicated loans," said a senior public sector bank executive.
